Weekly Update May Monday 24th 2021
What the change to minimum pension age means for clients
The government recently confirmed it would press ahead with changes to the normal minimum pension age, with it rising by two years from 55 to 57.
This change has long been trailed and was first floated by the coalition government in 2014 during the period of huge pension upheaval that was pension freedoms.
The idea behind it was to keep a proportional gap between the state pension and the age you could access private pension savings.
It was decided that 10 years was an appropriate gap and with state pension increases on the cards too, it was inevitable the government would eventually confirm their plans to raise the normal minimum pension age in line with it.
What the change to minimum pension age means for clients – FTAdviser.com
Profit warnings down but half of DB sponsors remain on life support
Profit warnings from listed companies with defined benefit schemes have dropped by two-thirds in the past six months, but more than half remain in the insolvency “danger zone”, according to figures from EY.
There were 13 profit warnings issued by listed companies with DB schemes in the first three months of 2021, 66 per cent down since the third quarter of 2020 and 41 per cent down since the fourth quarter, the figures showed.
They represent 26 per cent of all UK profit warnings and four per cent of all UK-listed companies with DB schemes.
UK quoted companies issued 50 profit warnings in total during the first quarter of 2021, down 83 per cent from the 301 recorded in the same period last year, which represents the largest year-on-year percentage fall in UK profit warnings on record.
Despite the good news, however, 59 per cent of listed companies with DB schemes remain in the insolvency “danger zone” and are using government support measures.
Pensions Expert reported in April that DB sponsors accounted for 43 per cent of the UK-listed companies that issued three profit warnings and claimed furlough support between March 2020 and March 2021.
EY’s updated figures show that a total of 64 UK-listed companies have issued at least their third profit warning in a 12-month period since March 2020, including 27 companies with DB schemes, though this figure remains unchanged from those reported in April.
Govt urged to encourage later life pension contribution plan
In a research paper published on Monday, the IFS stated that although individuals should start saving into a pension at a younger age, there are good reasons why contributions should increase substantially through their working life.
Considering that many employees experience earnings growth over their lifetime, the government should nudge people to increase their pension contributions when their children leave home, mortgages are paid off, or student loans come to an end.
Auto-enrolment into workplace pensions does not currently encourage contribution rates that increase with age, but future adjustments to this or other policies should carefully consider these issues, the IFS said.
Examples of policies that should be considered include default employee contribution rates that rise with age, increases in employee contribution rates that are triggered by earnings increases, and nudges to encourage individuals to increase their pension savings when their children leave home, or when they finish debt repayments such as student loans or mortgages.
The IFS research, which uses an economic model to illustrate how people would be expected to change their savings rates over their lifetime in response to predictable factors, showed that a “typical” graduate with two children should increase their pension contributions from around 5 per cent of pay before the children leave home to between 15 and 25 per cent of pay after that.
That would mean making two-thirds of their pension contributions after the age of 45.
Advisers urge early planning for pensions
Advisers have urged savers to take action while working to save more into their pension or risk ending up with an income shortfall after retirement.
Roy McLoughlin, associate director at Cavendish Ware, said it was important for people to ‘keep a close eye’ on pension provision and not ignore it.
He said: “In arguably the good old days there were final salary pensions which were effectively a ‘promise’, so people didn’t really have to keep a close eye on pension provision.”It’s demographics as to their demise but the radical mind set is that people now have to keep a much closer eye than previously.
“This is extremely difficult without guidance and education and that’s where the advisor becomes crucial. Proverbial heads in the sand on pensions will not work and while there are some excellent planning tools there is no substitute for good advice.”
Pointers to help set people on the road to boosting retirement income:
Set your goals – There are plenty of simple and free tools out there to help you project your retirement savings forward and will then show you how long those savings are likely to last in retirement.
Start early – Compound interest (or compound investment return) is the most powerful force in the universe, or as Einstein put it, “The 8th wonder of the world”.
If you work for a company, ask HR if they run a pension scheme where if you pay in more so do they (this is often called matched contributions). This could enable you to take advantage of higher employer pension contributions.
Use your allowances – Tax is effectively a cost drag on investment returns, making sure you use all available allowances and reliefs as far as you can reduces this drag and helps you reach your goals.